What does bond duration indicate?
The effective duration for a bond portfolio is the best indicator of interest-rate risk. Duration is a sophisticated measure of a bond’s “average” life, considering its time to maturity, stream of interest payments, and price. It’s essentially a weighted average time to recovery of all payments to the bondholder. For instance, the duration of a 20-year zero-coupon bond is its time to maturity—20 years—since all payments are received at that time; the duration of a 20-year, 10% coupon bond would be less than 20 years, since income payments are received prior to maturity. The duration of a bond mutual fund is found by averaging the durations of its bonds. The shorter the duration, the less risky the bond. Up-to-date duration information can be obtained from Morningstar.com and other Web sites that cover mutual funds or by contacting the fund company. Typical maturity-group duration ranges are one to three years for short-term funds, four to six years for intermediate-term and seven to 10
